Default Rates on Student Debt Increase with Lower Balances

What it shows is that default rates on student debt decrease with higher balances or, to put it the other way, the students with the highest default rates are the ones with the least debt.

I wouldn’t have predicted that but here are some possible explanations. First, dropouts have less debt and also less income. But while the debt rises proportionally with years of education the income rises in less than proportion. As I said in Launching, students who drop out after 2 years get less than half of the gains from completing a four-year degree (the sheepskin effect). Thus the 40% or so of students who dropout see their debt rise faster than their income so burdens are higher and default rates increases.

Although the debt to income ratio story is plausible it’s still surprising how many students default with low amounts of debt. Raymond, a commentator at the Liberty Street Blog, offers some additional hypotheses:

I work in financial aid at a large public community college. We pulled data on our defaulters and we found over 60% started with remedial coursework and borrowed their first and second terms. About 80% of the total data population suspended soon after the second term – thus the low amounts. Many were not students just out of high school, they were independent adults. Putting this altogether with the many years I’ve been in financial aid speaking with students I’ve come to a conclusion. 99% of the time when I have a student that has been suspended asking for loans and I mention private or alternative loans they immediately say they don’t have good credit. Bad credit seems to correlate with bad academics. Many seem concerned more with paying bills than paying education. Sometimes they are just out of jail and no one will hire them. Their probation requires they work or get a job which the later is nearly impossible. Other times we have people so deep in the hole in debt already that the student loans was a way to buy more time. The word is out if you have bad credit and are desperate for funds just go to a community college where tuition is low and borrow the maximum. We noticed in our data pull many students graduated from high school or received their GED up to 10 years ago or more! Want the defaults to go down – stop lending to students that have a significant number of remedial courses their 1st and 2nd terms at a college where tuition is already low.

Actually, students don’t even have to leave the house to get a student loan: on-line study qualifies for student loans. For those on the bottom rung, student loans are more like income support than education support. Replace the myriad of government programs, including student loans, for higher education with one, simple program: tuition free education at a public college or university for everyone. Not only would it better serve the purpose (promoting education), it would cost less. That’s right, tuition-free education at a public college or university for everyone, everyone, would cost less than what government spends today on higher education.

Except you’re so wrong you’re not even wrong. We got the Renaissance, the Enlightenment and the Industrial Revolution without student loans and Pell grants as well. We should expand Harvard so everybody can have a degree from Harvard, then just think how smart we’d all be!

If everybody goes to college, then the value of bachelor’s degrees gets lowered and upper tier students have to get grad degrees at increasingly stratified college. BTW, online universities hand out master’s degrees like candy.

This line of reasoning always makes me chuckle. Are you threatened by more people getting an education, degrees, certificates, etc? Not everyone needs an English degree from Oberlin, but there are lots of valuable things and skills people can acquire in college that help them get jobs and earn a living for themselves. And stay out of poverty and off the dole.

And with your statement you imply everyone is already achieving what they can education-wise. You think more people obtaining an education means that it must be of lower value than the education students currently receive. As if it is a zero sum game. If you look at the increase in educational attainment throughout history, you’ll see that you’re completely wrong.

Because you don’t need the externalities of a guaranteed student loan secondary market to accomplish that. Legal adults can bargain for job training like they bargain for all the other necessities of life.

I think the argument is that a diploma’s real value is significantly less than it was x years ago, while it’s cost has significantly gone up.

There are incentives (ideological and financial) to lower standards so more marginal students can attend and graduate university. These lower standards mean that the average quality of graduates is lower. Potential employers realize this and have raised their own standards for hiring by raising the level of credentials needed to get a foot in thee door. Thus more incentive to go back to university and get a better degree. The university then have more incentive to accept more maginal students for a higher degree, etc etc. The cycle continues.

The university wins because it has more students, paying even more money, and they can also say they are graduating and educating many many more people than before. Grade inflation, Credential inflation, etc can be ignored for several reasons. 1. It happens slowly and for the most part the only people paying attention are the ones making money off it 2. Criticizing schools for graduating more students at lesser quality is too nuanced an argument for the masses. 3. As with most institutions these days there’s too much obfuscation and bureaucracy to pinpoint what exactly is going on or who is to blame. Without a specific target to complain about, it is much easier to get away with something.

Colleges don’t sell education to students, they sell exclusivity to students, and prestige to alumni.

I’m not sure why these activities should not be subsidized by taxpayers.

The university education model is based on a period when books were so rare, you had to go to where the books were. This model does not make sense in the age of MRU and Udacity. Let employers give intelligence tests, let the students who need structure pay a reasonable cost for that structure. The rest of education spending is a gigantic deadweight loss to society.

I’m sure there is a tipping point to where more college graduates do not add much to the economy.
They should have a term for this. (see website name). I’d guess the range would be 25 – 30 %.
Eliminate, or at least do not subsidize most of the liberal arts majors.
Recognize a for number of these students college is pure consumption.

What is your estimate based on? College graduates have always done better than those with a degree. In fact, I the differences between the earnings of college graduates and non-graduates have continued to diverge in recent decades.

I’d say it’s the Pareto number which society seems to sort out everywhere else. 20% of HS grads should go to college; 20% of bachelor’s should get a master’s; 20% of the master’s into a PhD. You aren’t making silk purses out of sow’s ears; you’re just inflating the number of degrees and putting your higher achievers into ever more stratified and expensive universities for no good reason.

Obviously the poorest countries have very low levels of higher education, but it would be silly to claim that the former caused the latter.

Beyond a certain baseline threshold of economic development, you will find wide variation in the level of higher degree attainment that doesn’t have any clear relationship to the strength of a country’s economy.

@Jan, my point is that it seems pretty obvious that lack of college degrees isn’t the problem in a place like Somalia. Instead, unrest/poor institutions are causing both poverty and lack of education. I would argue that this is the case across the very poor countries in the world.

Even if you disagree with that, the question here isn’t “Should the U.S. have a very low education rate like third world countries?” With or without government aid, the U.S. is going to have a high rate of degree attainment, like every other wealthy nation. The question is, is there evidence that raising the percentage with college degrees from 40% to 45%, or lowering it from 40% to 35%, would cause a change in the economy? I say no.

In the United States, 42% of all 25-64 year-olds have a tertiary (higher education) attainment, making it one of the most well-educated countries in the world. Only Canada (51%), Israel (46%), Japan (45%) and the Russian Federation (54%) have higher tertiary attainment levels among this age group.

For 25-34 year-olds with tertiary education attainment, the U.S. ranks 14th among 37 OECD and G20 countries at 42% – above the OECD average (38%), but far behind the leader, Korea (65%).

A less radical proposal that would have a similar effect has been implemented in several European countries: Have the government provide loans for tuition, but students only need to repay them when/if they join the top 50% of the country’s wage earners.If they never do, their education will have been de facto free, but still there are social benefits to having them educated.

What wouldn’t be solved by this is the absurd growth in the cost of education. That needs independent attention, and it’s a daunting problem.

Don’t you want to be subsidizing the people who will make it into the top 50%? If you had perfect information, that’s what you’d do, right? You’d pay for the people who were going to become engineers and nurses and accountants. And you’d tell the people who were going to become barristas with anthropology degrees “Hey friend, this isn’t right for you: you’re wasting two years and a lot of money. Why don’t you try to get an HVAC cert?”

It’s anti-fair, but hopefully someone entering college will take that into consideration when thinking about whether to accept the loan. Theoretically, if incentives work right, you’ll then be subsidizing the people serious about college, and disincentivizing those not.

How about the reverse. If within 5 years after your degree you move above the 50% line then you don’t have to pay the money back whereas if your ethnomusicology type degree turns out to be worthless then the government can confiscate 50% of your wages/assets until your debt is repaid.

“That’s right, tuition-free education at a public college or university for everyone, everyone, would cost less than what government spends today on higher education.”

What complete bunk. The US Department of Education’s entire budget was under $70 billion; and that covers money spent on everything from pre-school through PhD programs and quite a bit of research and administration.

The US had over 20 million students in college last year. The average tuition cost of public colleges in the US last year was roughly $10K per student. So it would take around $200 billion per year to provide “free” college tuition.

You’re mostly right, but the Department of Education isn’t the only government spender. I remember when I was in school, there was a lot of money sloshing around from other government entities, notably defense, intelligence, and energy. I gather agriculture is big in some places.

Sure, but that’s generally for graduate level and it covers more than tuition. It might distort the picture somewhat, but it’s unlikely that replacing the current levels of tuition would be anywhere revenue neutral. Not even within $100 billion per year neutral.

When Jan hires employees: “Hi, I’m here for the Construction job?” ———– “Okay, the pay is $15/hour” ——————– “Sir, I have a degree in Anthropology from Northern Middle Southern East University College of Northeastern State Community” —————- “Oh, in that case, the pay is $20/hour”.

Actually all my employees must be minorities who have defaulted on their student loans without even having secured a community college certificate. It also helps if they are wearing a “f%ck the taxpayer” t-shirt.

1. Employers give preference to people with college degrees even if what they “learned” has no relevance to the job.

2. Employers give preference to people who graduate from “more prestigious” universities. Part of this is “rational” as a proxy for IQ, part of it isn’t. This allows the prestigious colleges to operate like a monopoly industry, especially due to “in-state tuition.”

My radical solution:

1. Have certain government limitations on how much colleges can charge in tuition. This will especially apply to the “prestigious” schools. There is a huge amount of waste is colleges, they will be forced to cut it. This will save both students and the taxpayer a lot of money.

2. Government policies to raise the bargaining power of workers, such as ending all immigration, raising the minimum wage(to 12$ or higher), subsidized or free healthcare, a government jobs program, and, if that isn’t sufficient, outright redistribution from the rich to the working class. With this, working class Americans won’t feel they have to send their children to college to qualify for paper-pushing jobs that didn’t used to require a college degree.

Surprising finding indeed. It might also be partly explained by the socio-economic background of those who are able and willing to take out these debts in the first place. If these are from the higher strata in the first place one would expect their family to be able to bail them out, and default might be less socially accepted within their peer-groups.

I had an interesting conversation once with a guy who came from what he described as a lower-class background. He apparently had used credit cards and racked up thousands of dollars in debt in his late teens attempting to start a music business. So his credit was totally shot right away.
His words were “Where I come from, you take what you can get.” Apparently, nobody in his family advised him against racking up debt, and most of them were completely comfortable with ripping off creditors with no thought for the long-term consequences of that.

Their data also includes PLUS loans, which are available to graduate students and professional students. If they are including those students borrowing for medical school or law school, then that could help explain what we’re seeing as well. Med school students will borrow a lot, but they also have much higher incomes after graduation.

I was thinking something similar: It takes very unusual circumstances to rack up $100k+ of student debt, and the people who do it are the sort who went to med school or law school.

I think this, together with the explanations in the post, make sense of this strange correlation. It’s important to note that if all this is right, it is absolutely incorrect that if *some individual* increases his or her debt, that will decrease his/her probability of defaulting on it. That would be a misinterpretation of the data.

It depends on what they do with the incremental debt. If they buy a more valuable education with it, maybe it makes sense. If some individual increases his debt by going to MIT over Purdue, or Bates over Middlebury, or to take an extra class, that would be consistent with the data. You can’t rule out that they get what they pay for, at least from the simple data in the OP. The trend is across all the buckets, so it doesn’t seem to be only the big decisions like “Do I go to med school?” as you propose.

Not that it’s obvious that’s what’s going on. Maybe higher debt people just have more comfort taking on the additional debt because they have asymmetric information about their repayment prospects, say because they have rich parents.

Bates over Middlebury? Bates College is a very fine school but I would not expect it to be a better place to pay to attend than Middlebury is. I would expect Middlebury graduates to have higher income than Bates graduates, and indeed Payscale.com says that mid-career Middlebury alumni make more, $96.3K annual income compared to $91.5. Granted Payscale.com’s data are not trustworthy, but both schools are expensive and highly selective — but Middlebury is a little more selective.

They’re nearly indistinguishable middle-of-the-road liberal arts colleges. I suppose I view Bates as a little better based on past hiring experiences, but I haven’t been to either and I’ve no dog in the fight. I should have picked obviously different examples, if only not to distract from my point.

The design of the graph is problematic for understanding what is happening in the middle. In particular, it’s impossible to determine what if there is any kind of inflection point in the 25K-100K range (which might explain the flatness of the 2nd and third to last bars). Would be more interesting to see a basic nonparametric smoothie to determine whether this is just med/law school effect or not.

At all levels, the default rates are unacceptably high. The $100,000+ default rate is like 18%, which is lowest on the chart. Aside from the government, what lender could remain solvent with such horrid loan payment performance?

With a sufficiently high interest rate, any lender could remain solvent with that level of default. Besides, student debt can’t be discharged through bankruptcy, so in practice a default is the same as extending the term.

I wonder if the difference in default rates has something to do with the likelihood of the lender going after the $100K debtor versus the $5K one. Or are all debts equally addressed by recovery efforts?

One explanation is that people who go to the more expensive liberal arts schools and/or pricey grad programs (i.e. the people who borrow the most money) simply end up doing pretty well for themselves and don’t default. The degrees that cost the most deliver value.

In this context, it’s probably correct. If you are going to a really expensive liberal arts school, you’ve probably got rich parents, have an inheritance in your future and the loan is pro forma. A mediocre student coming from a lower middle class family just isn’t going to get admitted to a school like Dartmouth and therefore doesn’t have the opportunity to borrow that kind of money.

There’s a distinct survivorship bias in these figures. You have to pass through multiple years in school to rack up a lot of loans. You have to be a good student at a good school in order to get to the $100K+ category. Most of those students are going to be successful and paying off the loans isn’t an insurmountable hurdle.

This probably isn’t what Jan meant, but liberal arts colleges are shockingly expensive. You’d think that not needing equipment or labs or supplies or technicians would mean you could teach people about Plato at lower cost than you could teach them about semiconductor fabrication, but apparently not. I guess all that ivy is expensive…

@ JWatts: the opposite is true, lower/middle class kids who can score high enough on the SAT will get admitted to top schools and given a free ride. Especially if they are (non Asian) minorities, but that’s not even necessary. My wife’s cousin, very white, was a smart kid and a water polo player from the lower middle class, got a free ride to Stanford. They want economic and geographic diversity at those schools not just racial.

Those most likely to default are community college grads. Hence the low amount. The highest amount represents doctors and lawyers. This makes perfect sense to me the cosmotologist will default with 2k but the doctor will pay with 100k

When job markets su*k adults go back to school. When they get out and job markets continue to s*ck and they end up defaulting. Rational behavior but unfortunate circumstances. Has someone compared job market conditions with enrollments and default rates?

IMO a big problem is that loans aren’t tied to the employment prospects or job market demand for the subject of study. So you have a lot of people studying things that there isn’t a lot of demand for. And I’m not necessarily talking about humanities. There are plenty of things like accounting, that SOUND good to someone who doesn’t know what to take, but where there are no real employment prospects for. There are people who go and get a 2-year degree in interior decorating or business administration, and find out that there are no jobs there.
And then there are colleges that will profit from that by ofering these credentialization courses and collecting the student loan money.

For some reason nobody wants to restrict student loan money to depend on job market conditions or employment prospects. They want ot do anything but. Statistics on schools. Graduation rates. But it doesn’t matter what the graduation rate in psychology is if psych grads still can’t get jobs. It doesn’t matter how many accounting majors you graduate if there are no jobs for accountants.

I attended college and law school at a public university before student loans were common; they weren’t common because the tuition (and cost of living) was so much lower (a few hundred dollars per semester for tuition, even for law school, a two bedroom apartment near campus $150 per month). The explosion in the cost of higher education tracked the explosion in student loans (and inflation in the cost of essentials like housing). Did the latter “cause” the former? I wouldn’t say “caused”, but certainly contributed. One has to ask: who benefits most from government subsidized student loans, the student/borrower or the college/university? My first comment about replacing the myriad of government programs for higher education with “free” education at a public college or university was meant to make the point that government subsidies for higher education cost the government more than all of the tuition paid to all public colleges and universities combined; providing a “free” college education would actually reduce federal government spending on higher education. But all of this is likely academic: as I comment often, we are in the finals days of higher education as we know it, as students seek alternatives to college and its high cost and low prospects. It’s Goodbye, Columbus! Or soon will be. The market has a way of clearing out inefficiency, even in education.

But all of this is likely academic: as I comment often, we are in the finals days of higher education as we know it, as students seek alternatives to college and its high cost and low prospects. It’s Goodbye, Columbus! Or soon will be. The market has a way of clearing out inefficiency, even in education.

I wish that would happen, but I don’t know if it will. Prospects for the non-college educated are still far worse. As America’s economy continues into the Average is Over age, I see more and more young people going to college for just the chance of a middle class value transference job as value creation jobs are automated or taken by immigrants.

I’m more surprised that people are surprised as this statistic. It isn’t how much debt you have which results in a default, its how much income you have relative to the payments. People who are defaulting with 1-5k worth of debt have much more immediate priorities for their income than paying some ethereal debt collector. I think they also have realistic expectations that there will be minimal consequences to not paying that debt. What are you going to do, garnish their welfare checks?

Easy solution: all government student debt should be 100% forgiven. Absolutely nothing bad at all would happen from this. The federal government should set up high quality universities that it funds and that are free to attend for anyone scoring in the top 20% on a standardized admissions test, with no weight given to meaningless nonsense like grades and extracurricular activities.

Unfortunately this concern is what would hold it back, which is unfortunate because a single standardized test is a MUCH fairer and more meritocratic admissions criterion than all the nonsense that goes into college admissions today — meaningless grades, dumb activities where the middle class shows off their cultural capital, recommendation letters, etc. One test would be much fairer and more meaningful.

Standardized tests are racist. Let’s give minorities and women a 20% boost and then focus the rest of our admissions on things like “spent a year in Guatemala feeding poor people”. That way the only people who are fucked are lower class whites.

The word is out if you have bad credit and are desperate for funds just go to a community college where tuition is low and borrow the maximum.

You guys have no idea how true this is. For those of you who aren’t familiar, the FAFSA will compute the loan amount you are eligible, which is the full course load plus living expenses. If you don’t take a full course load it is pretty easy to use FAFSA to borrow a lot more than you really need. You can buy a car with this money, for instance. Plus, not taking a full course load means you take longer to graduate, so the time period where you aren’t paying any interest is extended. You can stretch this out to 6-7 years. Then you can walk away and keep the car. You might even have equity in a house – purchase via FHA at 3.5% down, using the student loan money as the down payment. Alternatively, maybe you need money for medical expenses. Take the maximum loan and use the money to pay for your surgery or whatever. Dental work. Whatever. Take the money and use it to finance your DJ business, buy some big-ass amps and some speakers and throw raves. There are a lot of jackasses like this.

What do you expect when it’s not feasible that people get money by finding jobs? The federal government should hurry up about it and just institute a basic income. The days of people having jobs are over.

My cousin did this. She had a degree in a liberal arts field and was living a middle class lifestyle. After her husband got laid off from his middle class job and had to take a crappier, lower paying job, she took out loans and went back to school to be a teacher. This was after they had ran up a good deal of credit card debt and couldn’t get anymore. At around age 40, with three kids, she took out loans for “living expenses” which allowed her to continue to pay her mortgage and liver her middle class lifestyle. It worked for around two years, but she couldn’t find a job as a teacher, and eventually had to sell her house and move to a cheaper neighborhood in a cheaper city.

I can’t understand people who rack up credit card debt in an effort to maintain lifestyle.
If I was in that situation, I would sell the house or take in renters, pronto. Before my credit card debts started to mount.
Never have negative cash flow.

“I can’t understand people who rack up credit card debt in an effort to maintain lifestyle. ”

A good portion of the populace lives a life of wishful thinking.

It’s also not limited to the personal level. Consider the future SS/Medicare situation in the US. The obvious solution is to raise the near future retirement age and lower current benefits. But nothing is being done and the projections aren’t getting better. When you factor in the high likelihood of at least one US recession in the next 15 years, it’s likely the system will drain the “trust fund” and be insolvent within that period. It’s not a difficult problem, but there’s a wide scale refusal to take any current pain to avoid worse future pain. It’s exactly what happened in Greece.

“For SS/Medicare: Lowering the current payout is stealing since they already pay for it. Raising the age is breaking a promise since the promise of SS is at that age.”

Yes, these are the arguments that keep us heading full speed for the cliff. Granted, I tend to believe that at some point we’ll slam on the brakes. But it will still end up with the post-Baby Boomers getting the short end of the stick.

It’s important to keep in mind that SS will still provide roughly 75% and Medicare around 50% of current levels. I think the Gen-Xr’s and younger could probably swallow the 25% cut to SS, but the Medicare situation is going to require some difficult decisions.

Oh, god, Tommy, you’re looking so far into the future now. Lots of really talented people want to come to this country. Some to design your computer chips, some to clean your house and still others just to challenge your white privilege.

As others have noted, this is only surprising if you’re unfamiliar with the first cohort. Most of those people started college and decided it wasn’t for them, then also decided paying off student loans wasn’t for them either.

I’ll just point out again, if any other industry was doing this it would be called predatory lending.

Yes, the schools are the big winners. But remember, student loan debt is nondischargeable in bankruptcy.

If any other industry was selling products of questionable value to teenagers in exchange for six figure nondischargeable debt, there would be talk of jail time. What they’re selling is the closest thing to indentured servitude we have in America today.

I’m reticent to Google “Student loan bankruptcy debt settlement” because I like getting ads for Porsches and financial services, but I bet most of these defaults are getting settled for pennies on the dollar. Non-dischargeable debt notwithstanding.

Okay, I claim victory. About 10 percent of requests are settled outright, although that number is hard to find. Mostly the rest get income-based extended payment terms with forgiveness of any remaining unpaid balance at the end.

They receive modifications (which go under a bunch of names), like I said above. Outright settlement is less common, and generally happens when they borrower is sitting on cash but refusing to pay.

And since it appears to be a negotiated thing, the details are lacking. Good luck finding numbers – I don’t expect you’ll be able to tally anything. But based on your comment and Jan’s I fully expected to be wrong. They certainly are trying to sound sinister (with all sorts of “pay or else language”) but the details involve extend and forgive and various get out of jail free paths. I wasn’t basing my original comment on any deep experience with the industry, just knowledge of the extremely limited powers of lenders in the US and the really high default rates.

Dear Lord, There is no way you can claim victory, unless you think I am careless enough not to read the link you posted, which supports my claim.

Quoting from the report:

“The benefits from defaulting on student loans are, by contrast, limited. Unlike credit card debt, car loans, and other consumer loans, student loans cannot be discharged or reduced by a judge (known as “cramming down”) under personal bankruptcy. Instead, borrowers who are late with their federal student loan payments have to enter into a repayment plan that can last 10 to 15 years, and during that time, a fraction of their earnings will be garnished, similar to what occurs in a Chapter 13 repayment plan under per- sonal bankruptcy. The government can
also garnish the borrower’s tax returns and benefits. Other costs of defaulting on one’s student loans include limited future access to the credit market, since the borrower’s decision to default will affect his credit score from the credit bureau. Evidence from bankruptcy fil- ers may give some sense of the order of magnitude of these costs. For instance, using data from the Federal Reserve’s triennial Survey of Consumer Finances, Song Han and Geng Li find that bank- ruptcy filers are more than 40 percent less likely to have credit cards than comparable households that did not file for bankruptcy. If they do have cards, their lines of credit have far lower limits (by $12,000) compared with those who did not file for bankruptcy. Moreover, bankruptcy filers pay higher interest rates (1.2 percentage points higher) than people who did not file.5”

There are a number of modification plans available. They variously lower your payments, extend your term, and forgive what you can’t pay after some time. They require agreeing to pay in an enforceable way.

Settling outright obviously requires cash on hand to pay a reduced amount. That’s different from a modification, but the effect is similar.

My answer: “Want the defaults to go down? Let people default”. Creditors will develop risk models as appropriate. Students will adjust their borrowing behaviour. A more reasonable allocation of capital to education will emerge.

A naive answer I suppose, but we have interfered in this market so radically, what did we expect?